Nigeria: Investors await takeover of power assets

Power transmission03 September 2013, Lagos – After almost 10 years of struggling to privatise Nigeria’s power sector, the plan finally sailed through almost a fortnight ago, when the Federal Government’s National Council on Privatisation, NCP, blew the final whistle for preferred bidders to pay up and take possession of their assets. In this piece, Sebastine Obasi, assesses the level of preparations by the investors and the incumbent management of these 15 Power Holding Company of Nigeria, PHCN, successor entities to change ownership and leadership.

When 13 out of 14 bidders for the PHCN successor companies met the August 21 deadline for the payment of the remaining 75 percent of their bids, not a few Nigerians were upbeat that the much talked about power sector reforms would come to pass after all.

The Federal Government had realised about N400 billion from the sale, thus making it the biggest privatisation sales ever in the history of Nigeria, and Africa.

However, the euphoria and hope for improved power supply in the country, which would translate to an improved economy, may be a mirage if urgent attention is not paid to the lingering labour issues that had pitched the government against labour unions. Following the full compliance of the investors to take over the power stations, the important question many Nigerians are now asking is; when is the handover?

Waiting for instructions
Surprisingly, the incumbent managements of these privatised companies have ceded their rights to handover to the workers and the Ministry of Power.

According to a top PHCN official who spoke in confidence with Sweetcrude, “It is only the Minister and the labour unions that can comment on the preparedness of the management to hand over the plants to the new investors. The management is merely watching events as they unfold.”

But the National Union of Electricity Employees, NUEE, has dismissed government’s directive to the new investors to take over the PHCN assets, saying it is impossible to take over due to pending labour issues. NUEE cautioned that government would be creating a fertile ground for a show down, unless all labour issues are resolved.

According to the NUEE General Secretary, Mr. Joe Ajaero, “They cannot take over. It is absolutely impossible. Workers entitlements have not been paid. In most of the zones, Lagos, Ibadan, Benin, Enugu, and so on, not a single worker has been paid. In the few places that they paid, they only paid a fraction, leaving the bulk of money unpaid. If they are creating a scenario for a showdown, the workers are prepared for it.”

Ajaero argued that allowing the investors to take over the power stations would amount to economic fraud. “If the entitlement of workers is not paid before these investors take over, more people will be impoverished while a few continue to live in mass wealth.”

He also said that the sale of PHCN’s assets for about N400 billion was a far cry from its worth as the workers entitlement would cost about N500 billion. “How will the government raise the N500 billion to pay workers severance package. PHCN generates N300 billion annually and we want to sell it for less. It is sad,” he said.

He explained that the company’s revenue profile proved that PHCN generates about N25 billion a month, which amounts to N300 billion annually. According to him, the NCP Act stated that 10 percent share of the sale of PHCN should be given to employees, “which is not debatable”.

He therefore urged the government to implement the Hassan Sunmonu Committee’s report on the power sector reform, so as to settle the entitlement of workers.

Sweetcrude gathered that the handover of the 15 unbundled generation and distribution companies to the new owners may be delayed. Industry sources said that the handover will not be soon due to the inability of government to conclude payments of the severance packages of PHCN workers.

According to sources, due to the huge amounts involved (over N300 billion), it will not be economically wise for government to release the money at once.

“Because of the huge amount involved, government can’t release the fund at once, it is batch by batch and that will take some time to be concluded,” the source said.

Acquiring liability-free assets
Already, the new owners have made their decision known at a recent meeting with the power minister that they will not take over the companies unless all labour issues are resolved.

However, there are concerns that while the new investors are preparing to take over the PHCN assets, government is still spending money for their maintenance. Mr. Mike Uzoigwe, Chief Executive Officer, CEO, Egbin Power Station, Ikorodu, Lagos, said that the process of privatisation started since 2005, and if there had been no repairs since then, the station would have been operating below capacity.

“The point is that the process of privatisation started since 2005, that is eight years ago. If we had stopped repairing this plant since eight years because some people were coming to buy it, this plant would have been running only two units by now. But because we have been repairing this plant since eight years ago, we are currently running five units to generate 1,080 megawatts instead of 440MW from two units. “That is why we are going ahead to repair unit 6. The money is already in place and we are thinking that Nigerians will be better for it if power supply improves by tomorrow,” he said.

According to Uzoigwe, “Though privatisation and take-over of this plant may soon happen, we have a philosophy of continuation with all what we are supposed to be doing here until the day the new investors take over, otherwise this plant will be operating only two units and the country would be in deeper darkness. It is hoped that by the end of this year, power supply situation or available capacity in this country will generally improve, considering the completion of ST-06, which will make all the units in Egbin to operate and deliver the installed capacity of 1,320MW.”

Uzoigwe also noted that “Nigeria has never privatized the power industry. So, we don’t know how it works. If you read journals and internet, you will see some countries that tried privatisation but went back to where they were before because there were many challenges they never knew. In our own case, there are problems of bad infrastructure and political issues that are posing challenges to what the government has genuinely started. But we promise everybody that a day is coming in the future when there will be power all over the country.”

Outstanding issues
While government insists that the power reform is on course, concerns have continued to mount over what the Minister of Power, Chinedu Nebo has described as ‘slippages’. For example, in spite of repeated assurances for the payment of severance package for workers to be disengaged from the system to enable the new owners take over, payment only started early August, without evidence that the settlement would be completed soon.

Also, three conditions precedent are still pending. These are metering of the grid interface points, testing of the Market Operators Settlement Systems and processes; and the constitution of a dispute resolution panel.

According to the Chairman of the Roundtable of Distribution Companies, Dr. Ransom Owan, ” The industry agreements (power purchase agreements, vesting contracts and the transmission network agreements), which underline industry revenue would be deemed illegal and a nullity until the declaration is made by the Minister of Power. This government policy risk makes it very challenging for the capital markets inside and outside of Nigeria to support our efforts financially.”

He further explained, “As at now, the Discos operate at a loss and buyers would quickly deploy their respective turn-business around plans. However, a cost reflective tariff, which guarantees a regulated return and covers all Industry payments is not yet producing the desired results due to systematic and structural problems. If the Discos are unable to cover the cost of energy delivered to them, the Bulk Tracer, Transmission Company and Generating Companies will be adversely affected.”

Owan’s position points to the fact that electricity tariff would be high by the time the investors take full charge. This was corroborated by the Chairman of the Nigerian Electricity Regulatory Commission, NERC, Dr. Sam Amadi, who hinted that “minor reviews would be conducted twice a year, but these would not result in unnecessary price increases. Instead, the reviews could actually lead to a reduction in tariff,” he said.

Amadi did not sound convincing how two reviews in a year would not lead to price increase. He explained, “It is not true at all that consumers will be subjected to price increase twice every year. This is complete falsehood. There is a set tariff for 2012, 2013 till 2017. Though there are minor reviews in June and December of each year, these reviews will not always result in any increase. In fact, the review will not result in an increase because our financial and technical assumptions are accurate.”

Amadi described the Multi Year Tariff Year Order, MYTO, as a methodology to ensure that consumers have access to adequate and reliable electricity, stressing that it is a tariff plan that sets the prices of electricity over a period of five years.

According to him, “MYTO allows for minor and major reviews at certain intervals. Major reviews are conducted every five years, while minor reviews are conducted on a twice-yearly basis. The reviews are done to assess whether the changes of macro-economic indices such as interest rates, gas prices and inflation are significant enough to warrant a change in the tariff (MYTO year commences in July).”

He said that the Commission has put in place measures to strengthen power sector regulation, and gave the assurance that NERC would address the issue to restore balance and equity in electricity distribution.

On the transitional electricity market, he stated how rule-based industry is critical to its sustainability and growth, noting that as a regulator, NERC would protect consumers, whom he said are the primary concern of the Commission.

“When operators fail to follow rules, it creates serious problems. The flouting of the load allocation formula is an example. An industry that is weak on rules also sends the wrong signals to investors thereby stalling the development of new projects. To this end, NERC has been meeting with critical stakeholders – generation and distribution companies, Transmission Company of Nigeria, Nigerian Bulk Electricity Trading Plc to ensure that the necessary conditions for the commencement of the rule-based Transitional Electricity Market are met.

“The commencement of the Transitional Electricity Market will ensure more discipline, with all entities adhering to their contractual obligations as well as all rules and regulations, thereby translating to improved service delivery to electricity customers,” he said.

Notwithstanding the hiccups being experienced in the quest to revolutionise the power sector, the Ministry of Power said it would soon declare the TEM open, for investors in the sector to commence real business following its record of substantial compliance in payments by the preferred bidders.

The Minister, Chinedu Nebo, also reassured Nigerians and investors of government’s resolve to pursue the transformation agenda to the end, as well as to monitor the emerging transition market in order to protect the interests of both the citizenry and the investors.

According to him, the stability of the national grid is being enhanced to ensure effective transmission of any quantity of power being generated in the new dispensation, while efforts are also being made to provide more electricity off-grid, especially for the rural areas.

Investors unveil plans
While waiting for the federal government’s declaration of the TEM, the Chairman of Transcorp Ughelli Power Limited, TUPL, the new owners of the Ughelli Power Plant, Tony Elumelu, said that his company’s participation in the power sector reform was aimed at improving the living standards of Nigerians, as well as impacting positively on the economy.

According to him, TUPL will in the next five years, increase the power generation of the plant from 300MW to over 1,070MW.

“This is a laudable and remarkable achievement; but it is only just the beginning. We can now embark fully on our strategy to contribute to the development of Nigeria’s power sector whilst creating long-term economic and social value for our stakeholders and the greater community. We fully expect our engagement on this world-class project to improve the living standards of all Nigerians as well as impact positively on our country’s GDP,”

– Vanguard

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